Working Capital Financing Policies
The Langey Corporation is in a seasonal business It requires a permanent base of net working capital of 410 million all year long, but that requirement temporarily increases to $20 million during four month period each year. Langley has three financing options for net working capital.
a. Finance the peak level year round with equity, which costs 20% and invest temporarily unused funds in marketable securities, which ears 6%.
b. Finance permanent net working capital with equity and temporary net working capital with a short-term loan at 12%.
c. Finance all net working capital needs with short-term debt at 12.5%. Calculate the cost of each option. Which would you choose? Why?